Bearish News

Bloomberg BusinessWeek is out with a piece on Florida’s misadventures in real estate. Apparently Eaton Vance is dumping Florida municipal bonds tied to real estate deals at $.26 on the dollar.

Still no need to mark down any of those bank assets, of course. The underlying assets will bounce back, we keep hearing. Well, Moody’s says the Florida RE market might not recover until the 2030s.

Thomas Metzold, Eaton Vance Corp.’s co-head of municipals, sold all his defaulted bonds of Tison’s Landing, an unfinished housing development in Jacksonville, Florida, as the debt fell to a third of face value last year.

Dumping the so-called dirt bonds at a discount was a better bet, the Boston-based Metzold said, than taking over 218 empty acres (88 hectares) from the project’s builder and waiting for a real-estate rebound that may not come until the early 2030s, according to a Moody’s Economy.com forecast.

The BW piece is full of good quotes and info, and I do recommend reading the whole thing. Here’s another snippet:

‘It’s the single biggest default wave in the history of municipal bonds,’ said Richard Lehmann, the newsletter’s publisher, who defines default as failing to pay debt service or tapping reserves to do so. ‘There are about 78 more districts with $2.7 billion of bonds on our watch list that are likely to go into default this year.’

Source: Bloomberg BusinessWeek (which I’m quite impressed with lately).

Occasionally I write about what I’m buying on this site, so thought it would be worthwhile to review my picks and the reasoning behind them.

Note: Performance %’s are from date of post to 03/05/2010. In many cases, I stopped out earlier on losers or sold winners. I provide additional color when possible.

The Bad

Long Gamestop (GME) @ $24.50: Down 26%. A devious value trap, which still looks cheap to me at 7x trailing P/E. But it gets no respect on Wall St. Everyone’s too busy speculating on BAC and the TBTF mafia, over-leveraged REITs, etc. I am still long GME, but it’ll probably be even cheaper soon.

Short Simon Properties (SPG) @ $51: Down 54%. I’ve traded around this position a few times, with total losses of around 25% on it. I didn’t cover my initial $51 short in the $20’s when I had the chance. Got greedy, figuring they were headed to zero just like GGP. Then the Fed/Gov stepped in with more liquidity than God, and raising capital became much easier, especially for a well-connected REIT like SPG.

Expensive lesson learned, covered that $51 short in the high 40’s. I’ve re-shorted since and been stopped out for losses a few times (and am still stubbornly watching for signs that the inevitable and long-awaited CRE shoe is finally dropping).

Long GRZZX (May 2009): Down 49%. I sold this short-only mutual fund for a 20% loss, as the bull market picked up steam and bailout bonanza really got under way. Theory was that it would be nice to have a diversified basket of shorts for the inevitable double dip.

At that point the market had already bounced 28% from lows. The world was ending, and this little bounce was dead-cat in nature. Boy was I early. Not to mention generally naive about the effects of government-mandated recklessness. A few days after I bought GRZZX in May, I wrote The Deck is Stacked Against Shorts. A month earlier I warned bears that More Bailouts and Inflation Loom. Shoulda been bargain hunting or speculating on garbage stocks.

The Good

Long AAPL @ $81 (Jan 2009): Trades at $218.95: Up 168%: Apple was a lesson in how to trade the next panic. When that crazy growth-monster momo stock you lust after (but don’t want to pay a premium for) crashes, BUY IT. Other examples: VMW, GOOG.

I bought more AAPL at prices ranging from $81-$93, and ended up with quite a large position (for me). If I remember correctly,  Apple was trading at around a 16x P/E with screaming earnings growth and $30/share in cash. There really were some bargains there for a while… Still holding around 1/3, house money. Sold the rest from $160-$194. The stock is a beast, no telling where it’ll stop. But I am skeptical of the iPad’s prospects.

Long Palladium bullion @ $250/ounce: (June ‘09) Now trading at $470/ounce – Up 88% (June 2009). I think my thesis was solid, and appears to be playing out. Back then I said, “It may prove to be a good hedge against an inflation-fueled recovery. As the world continues to print money in an attempt to stimulate industry/consumers, demand and inflation could increase dramatically. This may in turn cause commodities like palladium to rise significantly, as governments artificially goose the markets.”

Long PGJ @ $13: (Jan ‘09) Trades at $24.21 – Up 82%. My favorite China ETF. It has minimal financial sector exposure (unlike FXI, where the index is 40%+ finance stocks). Still holding most of this.

Long TRAMX @ $5.66: (May ‘09) Now trades at $6.99 – Up 23%. Africa and Middle East mutual fund. If traditional emerging markets aren’t risky enough for you, you can buy this fund and get exposure to these politically volatile but fast-growing markets. Still holding.

Long EKWAX @ $45: (Jan 2009) Now trades at $73.29 – Up 58%: I love this gold fund. These guys know how to pick winners in the mining space. It’s up 602% over the last 10 years. I agree with George Soros here. Gold may eventually be a bubble, but it’s one that I want in on. And it has not come close to peaking yet, with countries around the world engaged in a currency race to the bottom. Still own it.

Morals of the Story, Lessons Learned

Overall I’m happy with the picks I’ve posted here. They either crushed it or bombed, not much in the middle.

I didn’t have enough long equity exposure in ‘09, but the ones I did have made up for it. I also own gold and silver, which have done well.

One of the biggest lessons for me was the difficulty of shorting in an environment like this. The Fed has been pumping liquidity into the system like mad, and outcomes depend more on the actions of a few questionably-motivated creatures (who have abysmal track records) than actual fundamentals. Nothing to be done about that though, from an investing perspective anyway.

In hindsight, it was clearly better to bargain-hunt and speculate than short in ‘09. My best gains of the year were pure speculation or value plays. I didn’t publish two of the big ones here, but I did post them on my old Motley Fool CAPS blog. One was CROX at $1.20 (trades at $7.49 today, 524% gain).  The other was Men’s Wearhouse @ $11.20 (trades at $25.17 today).

Reading hedge fund veterans like Bill Fleckenstein was quite helpful. I’ve been subscribing to his service for a while, and he closed his short-only fund near the market bottom, after a hugely profitable year. His short positions have been burnt by Fed Chairmen past, so he knew what effect all that Fed liquidity would have. He told readers he’d rather be in precious metals and cheap stocks than short.

I learned a lot about government intervention in general, and its impact on markets. Next time it looks like the world is ending, everyone should buy horrible pig stocks that will  benefit from the Feds’ clumsy/corrupt attempts to “stabilize the markets”, AKA bail out politically-connected mega-firms.

Good Tech Ticker clip featuring Peter Boockvar explaining why any deflation/disinflation will inevitably lead to more easing and ultimately inflation. I discussed this at length last year in Flaws in the Deflation Case.

Jesse gives us this hilarious depiction of Goldman Sachs’ role in the Greek debt crisis. According to Bloomberg, Goldman played a significant role in helping Greece hide its debt from the EU.

Here’s an excerpt from Jesse’s accompanying piece, Simon Johnson: Goldman Faces Special Audit and Possible Ban in Europe:

Regular readers will be aware of our thesis that the American Wall Street banks have become dominated by a culture of compulsive sociopaths who are incapable of reforming or restraining their greed. Like all addicts, they push the envelope looking for a new high, emboldened by each successful scam, the weakness of regulators, and the craven support of politicians, going further and further until at long last they go one step too far, with spectacularly destructive results.

Goldman Sachs may have reached that point. And as also suggested here, the rebuke may be coming from European and Asian nations who become weary of the extra-legal antics of the rogue American banks.

In the interests of harmony, the Europeans may once again bow to US pressure and continue to permit the Money Center privateers to roam through the interational financial system wreaking havoc, as they have been doing through the domestic US economy. It will be too bad if they do.

This is in no way an excuse for the Greek government. But what Simon Johnson is saying in this essay below is that Goldman is not only not blameless, but is enabling, complicit and perhaps even presenting the opportunity for market manipulation and fraud to other parties. Typically they like to ‘package’ these scams and take them from one customer to another, so that greed meets need, as a corrupting influence. It is no different than a bank engaging in money laundering in support of the criminal activity of another organization.

As always, Jesse’s latest is well worth the read. As is the Simon Johnson piece he references.

It’ll be interesting to see how Goldman stock reacts tomorrow when markets reopen after a long weekend. It should be an ugly day for GS, which in this bizarro stock-world means it will probably close up 5%. As Tyler of ZH says, good news is good, but bad news is better.

Sorry for the light posting lately, been on vacation and occupied with some other things. Should be back to normal soon.

I approve of this questioning by the Rep from Ohio:

On a related note, I’m almost done with Too Big to Fail — Andrew Sorkin’s insanely investigative bailout book. The stuff on AIG is fascinating. Apparently when the 100% payout was finalized, some pissed-off AIG guys saw some Goldman guys high-fiving each other, ecstatic about the deal.

I”ll have a full review of TBTF shortly. It’s the first book I’m reading on my Kindle, which is awesome. I’m taking notes and making bookmarks at key places, so I can find everything quickly for the review.